CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Tuesday, November 30, 2010

If You Subsidize Something with Tax Dollars, You Get More Of It, Even If Costs Far Exceed Benefits

Nov. 23 (Bloomberg) -- "Michigan taxpayers foot the bill for the most generous movie subsidies in the U.S. Since 2008, the state has allotted $282 million to lure the filming of Hilary Swank’s “Conviction,” Clint Eastwood’s “Gran Torino,” George Clooney’s “Up In The Air” and more than 120 other productions.

Now the governor-elect, Republican Rick Snyder, wants to curb the largesse. A state agency found the price of the program -- which covers as much as 42 percent of local expenses -- exceeds the economic activity generated. Jobs created in 2009 cost the state about $193,000 each, the agency estimated."

MP: Economic lessons to be learned here:

1. From Thomas Sowell: "The first lesson of economics is that we live in a world of scarcity. There is never enough of anything to satisfy all those who want it. The first lesson of politics is to ignore the first lesson of economics."

2. Public Choice Economics: In their short-sighted self-interest to get re-elected, politicians will always favor programs that have immediate benefits that are easily identifiable, even if the long run costs are much greater than the benefits, especially when the costs are hard to identify. Film subsidies are a perfect example. It would have been cheaper for the state of Michigan to simply pay people in the film industry salaries of $50,000 per year not to work, than to fleece taxpayers almost $200,000 per job in the film industry. But there's no political payoff to pay people $50,000 not to work, compared to the huge political payoff, though illusory, of "putting people to work in the Michigan film industry" at a cost of almost $200,000 per job.

If You Tax Something, You Get Less of It

"The underground tobacco market is spreading like a fast-growing cancer in the wake of tax hikes that make New York cigarettes the most expensive in the nation -- and it's costing the state tens of millions a month in lost tax revenue.

Illegal cigarettes are pouring into neighborhood bodegas by the truckload from neighboring Indian reservations, lower-tax states in the South and even as far away as China. Government data show that New York state is being smoked out of as much as $20 million a month from all these illegal cigarette purchases -- an estimated 7.3 million packs a month sold off the state tax radar.

Sales of taxed cigarettes have plummeted 27 percent since July, when state lawmakers raised the excise tax to $4.35 a pack on top of the city's tax of $1.50, making the average price of Marlboros here $11.60, with some shops charging as much as $14. About 30 million packs are being sold legally each month -- down from 41 million packs a month before July.

The plunge far exceeds tobacco-control experts' predictions that sales would fall 8 to 10 percent, indicating that smokers are finding other means to get their nicotine fix."

MP: Economic lessons to be learned here:

1. Taxes are always distortionary because people can change their behavior to avoid the tax. (The only exception: a "head tax," which cannot be avoided.) Elected officials almost always underestimate the ability of taxpayers to change their behavior to avoid taxes, and the New York cigarette tax example is no exception - experts predicted a 8-10% reduction in sales vs. the actual 27% decline.

2. In any discussion about taxes, we have to distinguish between "tax rates" and "tax revenues," especially when we talk about "increasing or decreasing taxes," with the assumption being that increases (decreases) in tax rates and increases (decreases) in tax revenues automatically happen together. In the case of cigarettes in New York the "tax increase" in rates resulted in a "tax decrease" in revenues because of what happened to the "tax base" (the amount of activity subject to the tax). In this case (as often happens), the increase in tax rates on cigarette caused the tax base (amount of cigarettes subject to state taxes) to shrink so significantly, that there was a decrease in tax revenue.

The same outcome often happens, whether the tax increase is on income, dividends, capital gains or retail sales. See a good overview here of "tax rates" and "tax revenues" by Thomas Sowell on a recent episode of "The Kudlow Report."

3. Shipping in Europe is showing strong gains: Hamburg's total cargo volume rose 8% during the first nine months of the year compared to 2009, Rotterdam's traffic jumped 31.4% over the same period, and Antwerp's cargo volume was up 13.2%.

6. Manufacturing output improved in the Midwest region in October according to the Chicago Fed, and in the Chicago region in November according to the Chicago PMI. The Dallas Fed reported a strengthening of manufacturing activity in Texas for November.

Restaurant Performance Index Reaches 3-Year High

The National Restaurant Association (NRA) reported today that its Restaurant Performance Index reached a three-year high of 100.7 in October, the highest level since September 2007 (see chart above). Restaurant sales set a new monthly industry record in October, with sales above last October by more than 4%, and year-to-date restaurant sales above last year by 2.6%. There were 24,000 new restaurant industry jobs added in October, bringing the total number of new jobs added this year at U.S. restaurants to more than 130,000.

A spokesman for the NRA, senior VP Hudson Riehle, credited recent improvements in real disposable income (+2.5% year-over-year gain in October, the highest increase in more than two years) as the main driver of increased restaurant activity in October. Further, Riehle says that with the upcoming holiday period ahead, it is definitely turning into a sales growth momentum environment for the restaurant industry, which is expected to carry well into 2011.

Consumer spending at restaurants is highly cyclical, and consumers can easily reduce this type of discretionary spending as economic conditions weaken, and this is exactly what the graph above shows. In fact, consumers starting cutting back on restaurant spending in the late summer of 2007, even before the recession officially started. The upward trend in the restaurant index over the last year suggests that consumers are gradually becoming more confident and eating out more often, and it looks like this trend will continue.

Monday, November 29, 2010

Markets in Everything: Cash for Fast Care in Canada

It's well known that Canada's single-payer health care system frequently results in delayed access for health care, since the "free" but still scarce medical resources get inefficiently rationed by non-price methods such as long waiting times. For example, the median wait time in Canada for a "free" MRI in 2009 was 9 weeks, but can be as long as 15.5 weeks in some provinces (source), compared to a wait of generally less than a week in the U.S.

"It's like the old Soviet system. Everything is free, but nothing is readily available. Except that we're not talking about lining up for toilet paper in Russia in 1976, but queuing for surgery in Canada in 2006."

But now there's a growing black market in Canada that allows patients to make cash payments to get to the head of the line or get the experienced surgeon they want, according to the Montreal Gazette in this article, "Want Fast Care? Slip an MD Some Cash":

"When their mother was diagnosed with pancreatic cancer, the twin sisters didn't hesitate for a moment: They chose the surgeon they wanted and slipped him $2,000 in cash to bump their mother to the top of the waiting list.

"We wanted to save our mother," Vivian Green said. "It was cash incentive, to buy our place ahead of everyone else." Green and her sister, Ora Marcus, say bribes are an open secret in the medical field. "If you have money, you live, and if you don't, you die."

The prices?

Minimum $2,000 to guarantee that a woman's doctor will be there for the birth. And it can go up to $10,000.For general surgery, the cost runs between $5,000 to $7,000 to jump the wait list into the operating room, he said. For Green and Marcus, the $2,000 got their mother's operation bumped up -but not the surgeon they wanted."

Shocking Video Evidence of "Consumer Greed"

Next time you hear somebody talk about "corporate greed" or about how greedy corporations are only concerned with profits and their "bottom lines," or that corporations "put profits before people," etc. show them these shocking examples of money-grubbing, greedy consumers who seem only concerned about one thing: their household's bottom line, and they are so greedy that they'll even "put low prices before people" as they trample one another to enter Target and Wal-Mart on Black Friday to snatch up low-priced items before others do.

The Federal Highway Administration reported recently that travel on all roads and streets in the U.S. increased by +1.5% in September compared to the same month last year. Total travel for the month of September was estimated at 247.8 billion vehicle miles, the highest travel volume ever for the month of September. The September increase in traffic was the fourth consecutive monthly increase compared to the same month last year, and the sixth increase in the last seven months.

On a moving 12-month total basis, the annual vehicle-distance traveled through September was 2,990 billion miles, the highest 12-month total since August 2008, more than two years ago (see chart).

Following a sharp decline in U.S. traffic volume (moving 12-month basis) that started in late 2007 and ended at a cyclical low in May 2009, traffic volume has been gradually increasing as both personal and commercial travel on U.S. roads and highways have rebounded (see graph above). Note that the cyclical pattern of traffic over the last three years, especially the sharp decline from late 2007 to May 2009, coincided almost perfectly with the official U.S. recession period from December 2007 to June 2009 (shaded area in graph). The sustained and ongoing improvements in vehicle miles since the summer of 2009, along with a record-high volume for the month of September, indicate that the U.S. economy is recovering gradually, and the chances of a double-dip recession are negligible.

In related traffic news, the American Trucking Association reported last week that its Truck Tonnage Index rose 6% in October on an annual basis, following a 5.3% year-over-year gain in September. There were also month-to-month gains of 0.8% in October and 1.8% in September. Year-to-date trucking tonnage is up 6.1% compared to last year.

Output and Profits Per Worker Are at Record Highs; Bad News: That Means a Jobless Recovery Ahead

The chart above shows quarterly increases in worker productivity, using output per hour from the BLS for the nonfarm business sector. The shaded areas highlight the one-year periods following the end of the last three recessions (1990-1991, 2001, and 2007-2009), and show the huge surges in productivity in the early stages of the subsequent expansions - as companies learn how to "do more with less." Notice that the productivity surge was greater following the 2001 recession than the 1990-1991 recession, and now the most recent productivity surge characterized by two consecutive quarters of gains above 6% (2009:Q3 and 2010:Q1) is much greater than the 2002 period. It's partly those productivity surges that translate into "jobless recoveries," and this time will be no different, and might actually be longer than the post-recession periods of weak job recovery following the last two recessions.

What motivated this post was a story in the Washington Post last Friday titled "Rising worker productivity, innovation boosts profits but may lessen hiring need," and here are a few key points:

"Companies slashed 8.5 million jobs during the worst recession since the Great Depression while also slowing capital investment plans. Campbell, the world's largest soup maker; DuPont, the country's third-biggest chemical maker; and United Parcel Service, the world's largest package-delivery business, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances that recession-casualty jobs will come back.

"When the productivity growth comes, then watch out because that is when companies start not needing so much labor," Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview. Phelps says productivity growth works in long waves. In boom times, companies stock up on equipment. In lean times, they find ways to maximize performance of that equipment.

Growth in productivity, or output produced in an hour of work, averaged an annualized 3.4 percent in the five quarters since the 18-month recession ended in June 2009. That is similar to the 3.7 percent gain in the first five quarters after the 2001-03 so-called jobless recovery. The efficiency gains have paid off in corporate profits. Earnings from continuing operations of companies in the S&P 500 have rebounded 23 percent since the fourth quarter of 2007. Sales have declined 9 percent over the same period."

Bottom Line: The good economic news is that the productivity of American workers has never been higher, and the recent huge productivity gains have translated into record-high profits for U.S. companies, measured both in the absolute dollar amount of after-tax profits, and also measured in real dollars of after-tax corporate profits perprivate-sector worker, which is at an all-time high of $11,312 and above the 2008 cyclical low of $7,000 by more than 60% (see bottom chart above). The bad economic news is that we might be in for several years of anemic job growth and a "jobless recovery," as a result of companies being able to expand output and increase profits without increases in employment.

Sunday, November 28, 2010

U.S. Patent Activity Continues to Grow

Except for 2006, more U.S. patents were granted in 2009 (191,927) than in any previous year (see top chart). And the number of patents granted in the last decade (1,827,000) is more than the number of patents granted in the quarter century between 1963 and 1987 (1,752,000). For patent applications, almost five million applications have been filed in each of the last three years, and there were more applications filed in the last ten years than in the 33 years from 1963-1995 combined (see bottom chart).

Bottom Line: Despite the "worst economic crisis since the Great Depression," the most important ingredients and determinants of long-term growth for the United States were relatively unaffected: innovation, entrepreneurship, ingenuity, creativity, originality, and advances in science and technology, measured by U.S. patents. Looking at the graphs above, you wouldn't even know anything of economic significance happened in the last few years - certainly nothing that materially affected patent activity.

Our "ultimate resource" - America's human resources, human capital and entrepreneurial talent - are still strong, and the vitality and dynamism of the U.S. economy will prevail. The U.S. economy has experienced 33 recessions since around the time of the Civil War, and has successfully emerged after each one into a new cycle of growth and expansion, and there's no reason that this last recession and the current expansion will be any different. Judging by the ongoing expansion of U.S. patent activity, the future looks very bright, and American exceptionalism will continue to thrive.

Interactive Map of the Day

World Stock Market Value Doubles Since 2009

Update: For the third time in the last four months, the World Federation of Exchanges reported a significant gain in world stock market capitalization for the month of October, with a $2.5 trillion increase that pushed the total value of world stocks to $52.7 trillion (see chart). The October increase follows strong gains of $2.7 trillion in July and $3.8 trillion in September (and a slight decline of $0.50 trillion in August), for a cumulative four-month gain of $8.5 trillion from July-October, one of the largest four-month gains ever for world stock market value.

From the cyclical low of $26.6 trillion in February 2009, the total value of world stock markets has almost doubled to $52.7 trillion last month, and provides further evidence of a worldwide economic recovery and global bull market rally.

Saturday, November 27, 2010

Best Sentence (Alliteration) I Read All Week (Year)

Pittsburgh Post-Gazette -- "A jury on Tuesday ordered SAP to pay $1.3 billion -- more than half of its total profit last year -- for a subsidiary's skullduggery in stealing a stockpile of software and customer-support documents from password-protected Oracle websites."

Weekly Rail Freight Continues to Post Gains

"The Association of American Railroads today reported for the week ending Nov. 20, 2010, U.S. freight railroads continue to post weekly rail traffic gains, originating 297,990 carloads, up 3.9% compared with the same week last year. Intermodal traffic for the week totaled 235,999 trailers and containers, up 10.6% compared with the same week in 2009, with container volume up 11.7% and trailer volume up 5.2% (see chart)."

Thursday, November 25, 2010

October International Air Traffic Rises Above Pre-Crisis 2008 Levels: Recovery is Strengthening

The International Air Transport Association announced today that there was a 10.1% year-on-year increase in passenger traffic for the month of October and a 14.4% year-on-year increase last month for international freight volume (see chart above). Passenger traffic has now increased in 14 out of the last 15 months, and five of those months have been double-digit improvements. Freight traffic has increased for 13 consecutive months, and the last 12 have been double-digit gains.

Giovanni Bisignani, IATA’s Director General and CEO said:

“As we approach the end of 2010, growth is returning to a more normal pattern. Passenger demand is 5% above pre-crisis levels of early 2008, while freight is 1% above. Where we go from here is dependant on developments in the global economy. The US is spending more to boost its economy. Asia outside of Japan is barrelling forward with high-speed growth. And Europe is tightening its belt as its currency crisis continues. The picture going forward is anything but clear, but for the time being, the recovery seems to be strengthening."

Giving Thanks for Capitalism, The Invisible Hand, The Miracle of the Market and No Turkey Czars

Like in previous years, you probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

The reason your Thanksgiving turkey was waiting for you without an advance order? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." And even if your turkey appeared in your local grocery stores only because of the "selfishness" or "corporate greed" of thousands of turkey farmers, truckers, and supermarket owners who are complete strangers to you and your family, it's still part of the miracle of the marketplace where "individually selfish decisions lead to collectively efficient outcomes."

In a 2003 Boston Globe column titled "Giving Thanks for the Invisible Hand" (available only in the paid archives) Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes affordable turkeys automatically available so efficiently at Thanksgiving:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn't have to do anything but show up to buy it. If that isn't a miracle, what should we call it?

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure.

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth?

Tuesday, November 23, 2010

Don't Blame U.S. Consumers for Overspending

A senior CNN writer cooked up quite "a stew of errors, misunderstandings, and non sequiturs" (to quote Don Boudreaux referring to another recent "trade stew") about trade imbalances in an article titled "The Trouble With 'Global Imbalances'." Don responded here to this example of the "hysteria stirred up by the incessant barrage of uninformed reporting about trade and trade deficits."

One theme of the CNN article of "global imbalances" is that Americans "overspend" and "overconsume," and this consumer profligacy allegedly contributes to the "global imbalances." Here are some excerpts:

"The real problem is overspending by U.S. consumers, and not enough spending by consumers in some of those other markets.

"The bottom line is we overconsume," said Diane Swonk, chief economist at Mesirow Financial. "What [rebalancing] means is fundamentally changing what we're doing. It's going to be painful."

How to reduce that overconsumption by Americans, and how to spur spending by consumers in emerging economies such as China and India is not easy, according to economists."

MP: The chart above of the U.S. personal savings rate shows that Americans have been saving between 5-6 percent of disposable personal income in every month for the last two years, and that's the highest level of savings since the mid-1990s. With Americans now saving at the highest rates in 15 years, can there really be a problem with "overspending by U.S. consumers?" If there is a problem in the U.S. of "overspending," it's not the millions of consumers who are to blame, it's probably gotta be that other group - the one that has 535 members.

Rapacious Income Inequality?

In a recent editorial titled “A Hedge Fund Republic?” New York Times columnist Nicholas Kristof claims that if you want to observe “rapacious income inequality,” you don’t need to travel to a banana republic. Rather, you can simply look around the United States to see “stunning inequality” that is supposedly the result of some rapacious plundering of America’s poor by wealthy plutocrats.

PR Newswire -- "comScore, a leader in measuring the digital world, today reported holiday season retail e-commerce spending for the first 21 days of the November – December 2010 holiday season, as well as its official spending forecast for the season. For the holiday season-to-date, $9.01 billion has been spent online, marking a 13% increase versus the corresponding days last year (see chart)."

"The beginning of the online holiday shopping season has gotten off to an extremely positive start, outperforming our earlier expectations," said comScore chairman, Gian Fulgoni. "Despite continued high unemployment rates and other economic concerns, consumers seem to be more willing to open up their wallets this holiday season than last. While this early spending surge reflects, in part, heavy promotional activity on the part of retailers occurring earlier this season, it is nevertheless a very encouraging sign."

The official comScore 2009 holiday season forecast is that online retail spending for the November – December period will reach $32.4 billion, representing an 11% gain versus year ago. This strong growth rate represents an improvement compared to last season's 4% increase.

"After a year in which we already saw growth rates return to solid positive territory, the recent strength in holiday spending has led us to raise our official forecast to 11 percent from the 7 to 9 percent we were initially expecting," added Fulgoni. "We are seeing online spending surpass the totals we saw in 2007 prior to the recession and expect sales this holiday season to be the highest on record with more than $32 billion being spent during the November and December period."

Consumer Spending Is Back to Pre-Recession Level

From Table 8 in today's BEA report: Real personal consumer expenditures reached $9.34 trillion in the third quarter, the highest amount of quarterly spending since the slightly higher $9.342 trillion in the fourth quarter of 2007 when the recession started (see top chart).

On a percentage basis, real personal consumption expenditures grew by 2% in the third quarter compared to the same quarter last year, and this was the largest quarterly increase in consumer spending in three years going back to the third quarter of 2007 - the quarter before the recession started (see bottom chart).

Satellites Show Mall Traffic Surge in November

BARRONS -- "Mall traffic for November 2010 has shown a steep rise recently, according to a report released today by Thomson Reuters. Using satellite images the firm is able to measure parking lot traffic, which correlates well with same-store sales.
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“Based on this relationship, we may be seeing an early sign that stronger November 2010 mall traffic is pointing to stronger same-store sales,” wrote Thomson Reuters analyst Jharonne Martis-Olivo in the report. At 3.5%, the Thomson Reuters Same-Store Sales Index for November is significantly stronger than the 0.5% in November 2009 and the -7.8% for November 2008.

“Retailers seldom release average ticket prices, but the CPI was flat as of the Nov. 17, 2010 reading,” Martis-Olivo wrote. “Thus, if November mall parking lot traffic has been on the rise, while inflation remains unchanged, then there’s a pretty good chance that shopper conversion rates could be higher this year.”

SNL Skit on TSA Enhanced Security Procedures

Real Corporate Profits Back to Pre-Recession Levels

U.S. corporate profits reached a new record high in the third quarter of $1.221 trillion (at an annual rate), after taxes and adjustments for inventory valuation and capital consumption (see graph above, data here), according to today's BEA report. Compared to the second quarter, corporate profits increased by $12.6 billion during the summer months, and that makes seven straight quarterly gains in profits going back to the first quarter of 2009. From the cyclical bottom of $774 billion of profits in the fourth quarter of 2008, profits for U.S. companies have rebounded by 57.6%, and by $446.5 billion.

Adjusted for inflation (using the Business Sector Deflator), real corporate profits in the third quarter were just slightly below the all-time record high of $1.229 trillion in third quarter of 2006 (see red line in graph above).

Markets in Everything: Hire A Professional Ad Writer to Help With Your Dating Profile

"Make your inbox go from empty to full of promise.I'm Kate Houston, I've been an award winning ad writer for 20 years. I find out what makes you special then, with a few choice words, I make you irresistible.

Online dating is competitive. With thousands of singles online, even good looks are not enough. But, you can stand out from any crowded online dating site! All you need is a dating profile so engaging, it gets attention and keeps it - and that's my speciality (sic)!"

MP: Prices start at $20 to re-write an existing profile, and $80 to write an entire new profile. Let's hope the spelling is better than Kate's own ad copy above!

Monday, November 22, 2010

Gotta Love Wal-Mart

THE ATLANTIC -- "In October, Walmart unveiled its commitment to sustainable agriculture, including a goal to double the amount of locally grown produce we sell in the United States. But what does that mean and how will we do it? To better understand where Walmart is heading, let's take a look at what we're already doing with jalapeño peppers.

Today, we source jalapeño peppers from 20 states—including some you wouldn't think of, like New York and Michigan—and jalapeños have proven to be a win-win-win. Our customers get a fresher product. We save money on freight so we can keep our prices low, while slashing carbon emissions. And our farmers are thrilled with our new strategy—they are earning more, and they're now coming to us to ask what else the market might want that they can grow."

MP: Although Wal-Mart has a reputation for: a) outsourcing its products overseas, and b) putting local, small merchants out of business, this is an example of exactly the opposite: a) sourcing its produce locally, and b) supporting local, small farmers.

Case Study in Rent-Seeking and Capture Theory

WASHINGTON — "The companies with multimillion-dollar contracts to supply American airports with body-scanning machines more than doubled their spending on lobbying in the last five years and hired several high-profile former government officials to advance their causes in Washington, records show.

L-3 Communications, which has sold $39.7 million worth of the machines to the federal government, spent $4.3 million to influence Congress and federal agencies during the first nine months of this year, up from $2.1 million in 2005, lobbying data compiled by the Center for Responsive Politics show. Last year, the company spent $5.5 million on lobbying.

Rapiscan Systems, meanwhile, has spent $271,500 on lobbying so far this year, compared with $80,000 five years earlier. It has faced criticism for hiring Michael Chertoff, the former Homeland Security secretary, who has been a prominent proponent of using scanners to foil terrorism. Officials with Chertoff's firm and Rapiscan say Chertoff was not paid to promote scanner technology. It spent $440,000 on lobbying in 2009. The government has spent $41.2 million so far on Rapiscan's machines."

U.S. Hotel Industry Improves in October

HENDERSONVILLE, Tennessee—"The U.S. hotel industry posted increases in all three key performance measurements during October 2010. In year-over-year measurements, the industry’s occupancy was up 6.9 percent to 61.3 percent. Average daily rate ended the month with a 1.2-percent increase to $100.89. Revenue per available room for the month rose 8.2 percent to finish at $61.89 (see chart,click to enlarge)."

“Overall, industry fundamentals continued to improve across the board in October,” said Mark Lomanno, president of STR. “While room rate growth remained sluggish in October, we attribute that to lower rated group business that was booked months before there was a significant demand turnaround. We’re hopeful that we will see steady, but probably slow, room rate growth for the remainder of the year.”

For both: a) the three month period from August-October, and b) year-to-date through October, hotel occupancy rates improved compared to last year.

Sunday, November 21, 2010

Markets in Everything: Oil-Filled Wine Bottles

"Wine bottles have been flying off the shelves at gas stations in North Dakota recently. Bakken Formation Wine, however, isn’t meant for drinking.

The bottles, being sold at Cenex gas stations in Tioga and Stanley, are filled with Bakken oil “Vintage 100 million years,” according to the stickers on the bottles. Diane Clark, station manager at the Tioga Cenex station, said 1,000 bottles of Bakken Formation Wine were made.

“All proceeds will be set aside for donations to local charitable organizations in the Tioga and Stanley areas,” said Clark. Bottles of Bakken Formation Wine have a sale price of $10."

2010-2015 Could Be The Strongest Six-Year Period of World Real GDP Growth in a Generation

The International Monetary Fund is now predicting world real GDP growth this year of 4.6%, followed by 4.3% next year, and then 4.50% growth or above from 2012 to 2015. If so, the 2010-2015 period would be the strongest growth for the world economy during a six-year period in at least 30 years (see chart above).

Japan: Exports Surging from Strong Global Demand

1. "Japanese export ship orderssurged 88.5 percent in October compared with a year ago to 675,300 gross tons. Climbing back after 15 months of steep decline in the global recession, ship orders have grown by large double digits and sometimes into triple digits in the last 11 months. In August the gain was 111.3 percent."

2. "All Nippon Airways (ANA) increased its international cargo volume 32.6 percent from last year to 42,007 tons in September, the 13th consecutive month of growth. Gains outpaced the 30.2 percent increase in August. In the first half of fiscal 2010, ANA's international cargo volume totaled 240,421 tons, up 40.4 percent from a year earlier. The carrier's domestic cargo volume between April and September amounted to 232,509 tons, up 4.1 percent from the same six-month period last year."

The Mandarins Now Come to Cuba By Boat

You would think that oranges on most citrus-friendly Caribbean islands would be a common, locally grown, readily-available fruit. Well, not if that island is Cuba, as Cuban blogger Yoani Sanchez explains here in a post titled "The Mandarins Come by Boat."

Saturday, November 20, 2010

Tenure: Economic Anomaly That Protects Laziness

From today's Wall Street Journal article "How to Succeed in Teaching Without Lifetime Tenure: The Franklin W. Olin College of Engineering attracts 140 applicants for every faculty position. And they can even be fired" (paid subscription may be required to view full article, but see first comment below):

"Franklin W. Olin College of Engineering in Massachusetts is showing what's possible when a school sheds tenure, one of the most antiquated and counterproductive employment policies in the American economy. Instituted at a time when people in most professions remained in the same job for life, tenure today is an economic anomaly. The policy protects laziness and incompetence — and rewards often obscure research rather than good teaching."

Right-to-Work vs. Forced Unionism States in 2009

The Bureau of Economic Analysis just released state-level GDP data for 2009, and the chart above shows how individual states were affected by the economic downturn. Real GDP declined in 38 states in 2009, and overall GDP for all states declined by -2.14%.

Here's a comparison of right-to-work states vs. forced unionism states for real economic growth in 2009:

Right-to-work states: -1.66%

Forced unionism states: -2.42%

All states: -2.14%

In other words, the decline in economic growth in forced unionism states (-2.42%) was 0.76% worse in 2009 than the decline in right-to-work states (-1.66%). Further, of the ten states that experienced positive growth in 2009, only two were forced unionism states (Alaska and W. Virginia) and eight were right-to-work states (Nebraska, N. Dakota, S. Dakota, Arkansas, Louisiana, Virginia, Oklahoma and Wyoming). The three top states with the highest growth in 2009 were all right-to-work states: Oklahoma (6.6%), Wyoming (5.4%) and North Dakota (3.9%).

Friday, November 19, 2010

Quote of the Day

China's Single-Child Adults Too Selfish for Marriage?

From economic theory we know that monopolists, when insulated from market competition, can get away with charging high prices and offering poor service. A single child has a form of "monopoly power" on his or her parents' time, affection, attention and financial resources, and without competition from rival siblings, can often exercise that monopoly power by behaving selfishly and narcissistically. Of course the parents can play a role by pampering their only child, but the stereotypical outcome is that only children (monopolists) become "spoiled."

There are now reports that China's divorce rate is soaring (Beijing's divorce rate is almost 40%), possibly because China's spoiled "single-child monopolists" may be "too selfish for marriage" as adults.

According to a recently-divorced 24-year old Chinese woman:

"Marriage requires forgiveness, understanding, tolerance and compromise. Yet we post-1980s generation neglect this entirely. No one will compromise. We just argue. Of all my friends who are married, 100 percent are unhappy."

And looking to the future she has this telling comment: "Next time I'll look for a husband with siblings."

Thursday, November 18, 2010

How Did We Get in This Mess? "Reckless Departure"

"In 1995, HUD announced a National Homeownership Strategy built upon the liberalization of underwriting standards nationally. It entered into a partnership with most of the private mortgage industry, announcing that "Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership [including Countrywide] should work collaboratively to reduce homebuyer downpayment requirements."

The upshot? In 1990, one in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%. By 2006 an estimated 30% of all home buyers put no money down.

"The financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices," Sheila Bair, chair of the Federal Deposit Insurance Corporation, noted this June. One needs to look no further than HUD's affordable housing policies for the source of this "reckless departure." If the mortgage finance industry hadn't been forced to abandon traditional underwriting standards on behalf of an affordable housing policy, the mortgage meltdown and taxpayer bailouts would not have occurred."

MP: A good summary of how the political obsession with affordable housing caused a lot of the problems in the real estate and mortgage industries, and led to the financial meltdown.

Weekly Rail Traffic Continues Steady Gains vs. 2009

The volume of weekly rail traffic continues to register improvements over last year, and the gains in Week 45 (November 8- 13) announced today by the American Association of Railroads were 5.8% for carloads (297,269), and 11.9% for trailers and containers (232,888 intermodal units) compared to the same week of 2009.

Steady weekly improvements in Warren Buffet's single-most favorite indicator ("rail traffic") indicate that there are ongoing increases in the demand for raw materials, commodities, parts, grains, lumber and other inputs, which will translate into future increases in final output. In other words, the increases in raw materials moving around the country by rail can only mean one thing: overall economic activity is picking up.

Leading Index, NY Fed Predict Continued Growth

The Conference Board's Index of Leading Indicators increased again in October, marking the fourth straight monthly gain in the gauge of future economic activity, and the 17th increase out of the last 19 months going back to April 2009 when the recession was winding down. Back-to-back monthly gains of 0.5% in the Leading Index in September and October suggest that the economic recovery will stay on track through the end of this year and continue to improve through next spring. According to the Conference Board, "the indicators are suggesting a mild pickup this spring."

In the last week, the Conference Board has also reported improvements in the leading indicators for China (+0.6%), U.K. (+0.3%) and Korea (0.8%), and declines for Spain (-0.1%) and Japan (+0.3%).

In another recent forecasting release for the U.S. from the NY Fed, its updated Treasury model through October continues to predict almost no chance of a recession through October of 2011.

Weekly Jobless Claims Fall to 26-Month Low

The Department of Labor reported today that the four-week average of initial unemployment claims fell to 443,000 for the week ending November 13, which is the lowest level since the first week of September 2008, more than two years ago (see chart above). The number of workers continuing to receive jobless benefits fell to 4,353,250 last week on a four-week average basis, the lowest level in almost two years since early December 2008.

Although it could be a lot better, the trends in jobless benefits are certainly moving in the right direction, and point to a labor market that is gradually recovering.

U.S. Consumers Move Towards Online Shopping

1. As a share of total retail sales in the third quarter ($978.7 billion), E-commerce sales ($41.5 billion) reached a new record high of 4.2% (see chart). That compares to about a 2% share in 2004 and 1% in 2000.

2. E-commerce sales of $41.5 billion in the third quarter of 2010 was the first time U.S. consumers spent more than $40 billion shopping online in a three-month period, and was also a new record for quarterly E-commerce sales.

3. Compared to the third quarter last year, E-commerce sales this year were up by 13.6% vs. an increase of 6% for total retail sales over the same period.

4. Online shopping increased by 4% in the third quarter compared to the second quarter, vs. a 0.8% increase for all retail sales.

Wednesday, November 17, 2010

Cleveland Fed Median CPI: No Inflationary Pressure

According to the Cleveland Fed's report today, its median CPI measure of prices increased by only 0.50% in October over the same month last year, the same as the year-over-year rate for each of the last three months (August - October). October marked the 26th consecutive month that the median CPI annual inflation rate dropped or stayed the same, and the 0.50% inflation rate in six out of the last seven months is the lowest year-to-year inflation rate in the history of the Cleveland Fed's series back to 1984 (see chart above). In contrast, the regular CPI from the BLS increased by 1.2% over the last year (October 2009 to October 2010), and has held steady at between 1.1 and 1.2% for the last five months.

Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and neither the median CPI from the Cleveland Fed nor the CPI from the BLS is showing any signs of inflationary pressures.

1.The death toll from Mexico's drug war passed the 10,000 mark in early November, reaching 10,035 killed since the start of the year. At that pace (1,000 per month), there will be around 12,000 deaths in 2010 from the War on Drugs (including so far this year 52 soldiers, 637 police officers, 276 minors, 326 decapitated victims, almost 800 victims who were tortured before being executed, etc.), which could more accurately be called "The War on Innocent Mexican People Because of Insane Drug Laws." One thousand drug-related murders per month would be more than 33 killings every day, and more than one murder every hour of each day.

The 12,000 drug-related murders in Mexico this year will bring the drug death toll in the last five years to about 30,000 (see chart above) as a result of drug laws in Mexico and the U.S. In contrast, there have been "only" 4,561 combat-related American deaths in Afghanistan and Iraq combined since 2001.

2. As a Result of the War on Drugs, Mexico Has Its First Displaced-Persons Camp (source)

"When Hurricane Karl struck south-eastern Mexico in September, around 3,500 people left their homes to escape flooding. Last week, it was the north-east of the country that saw a displaced-persons camp sprout up. But the 400 people who are currently holed up in the event hall of the Lions Club, a charity group in the border city of Ciudad Miguel Alemán, were not relocated by act of God. Instead, they have fled from a man-made disaster: the fierce battle between the area’s two warring drug gangs, the Zetas and the Gulf “cartel,” for control of trafficking and dealing in the nearby town of Mier.

The drug gangs have plundered the well; burned the city’s police station, several businesses and dozens of vehicles; hung a dismembered corpse in a public park; and engaged in regular firefights. Schools have closed, and even the local government has abandoned its offices in favour of safer quarters in Ciudad Miguel Alemán, 15km away.

Many smaller municipalities along the border have also become virtual ghost towns this year. But the recent flare-up in Mier happened so quickly that some residents did not have time to arrange for a place to stay. In response, the town’s government-in-exile established a shelter at the Lions Club, and offered the room to those with nowhere to go."

MP: Can there be any rational, logical solution to stop this insanity other than the obvious one - legalization?

4. Women may value non-wage benefits more than men do, and as a result prefer to take a greater portion of their compensation in the form of health insurance and other fringe benefits.

The study concludes that “the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers.”

And yet the Senate will vote this week on “The Paycheck Fairness Act,” which according to the American Association of University Women is a critical piece of legislation that “can help create a climate where pay discrimination is not tolerated, and give the new administration the enforcement tools it needs to make real progress on pay equity.”

Read more here at The Enterprise Blog about how The Paycheck Fairness Act Will Fatten Paychecks for Trial Lawyers, Not Women.

Update: The Paycheck Fairness Act failed in the Senate today - 60 votes were needed to move the bill forward and the supporters had only 58 votes.

Billion Prices Project @ MIT

"The Billion Prices Project @ MIT is an academic initiative that collects prices from hundreds of online retailers around the world on a daily basis to conduct economic research. We currently monitor daily price fluctuations of ~5 million items sold by ~300 online retailers in more than 70 countries.

BPP Database Key Facts

Statistics updated every day

5 million individual items

70 countries

Started in October of 2007

Supermarkets, electronics, apparel, furniture, real estate, etc.

Data collection: Our data is collected every day from online retailers using a software that scans the underlying code in public webpages and stores the relevant price information in a database. The resulting dataset contains daily prices on the full population of products sold by individual retailers, allowing us to observe every single price change that takes place. Our data includes information on product descriptions, package sizes, brands, special characteristics (e.g. “organic”), and whether the item is on sale or price control.

Example: The chart above shows daily price indexes for the U.S. from July 2008 through November 15, 2010, comparing the BPP Index to the Consumer Price Index.

Used Car Prices Reach Record High in October

Used car prices reached a record high in October according to Manheim Consulting's Used Vehicle Index (see chart above) and also Edmunds.com, which reported the average used car price reached a record high of $18,570 last month. From a CNN article:

"According to Karl Brauer, an analyst for automotive website Edmunds.com, those preferring used cars over new fall into two categories: buyers who are forced to economize and others who can afford new but decide to hold off because "there's a bit of a stigma to spending." Or, as Tom Webb, chief economist for Manheim Auto Auctions, put it: "It's cool to be frugal."

Here are some of the factors reported by CNN that have pushed used car prices to record levels:

1.Improvements in design, materials and manufacturing mean that today's vehicles can be operated safely longer than ever, which helps used vehicles retain their value longer.

In its monthly release on vehicle sales, Manheim Consulting reports that in addition to a healthy used car market, "new vehicle sales suggest a solidifying recovery."

It's also important to recognize that U.S. automakers like Ford have been significantly more profitable in 2009 ($2.7 billion profit) and 2010 ($6.4 billion profit in the first three quarters of 2010), even with significantly fewer units sales than in 2008 when it lost almost $15 billion and 2007 when it lost $2.7 billion. The focus on cost reductions over the last several years (e.g. getting hourly labor costs down from $78 to about $52) are now translating into strong profits for Ford and GM and have helped the U.S. automakers experience a strong, and ongoing rebound.

Update: According to CNBC, GM made a profit of $3,000 per vehicle in the third quarter of 2010.